Manel Baucells

Group Decisions with Multiple Criteria

We consider a decision problem where a group of individuals evaluates multi-attribute alternatives. We explore the minimal required agreements that are sufficient to specify the group utility function. A surprising result is that, under some conditions, a bilateral agreement among pairs of individuals on a single attribute is sufficient to derive the multi-attribute group utility. The bilateral agreement between a pair of individuals could be on the weight of an attribute, on an attribute evaluation function, or on willingness to pay. We investigate cases in which each individuals utility function is either additive or multiplicative. In the additive case, the group utility can be represented as the weighted sum of group attribute weights and group attribute evaluation functions. In the multiplicative case, the group utility takes a more complex form.

Satiation in Discounted Utility

In this paper, we propose a model of intertemporal choice that explicitly incorporates satiation due to previous consumption in the evaluation of the utility of current consumption. In the discounted utility (DU) model, the utility of consumption is evaluated afresh in each time period. In our model, the utility of current consumption represents an incremental utility from the past level. When the time interval between consumption periods is large, and there are, therefore, no carryover effects, our model coincides with the DU model. For short time intervals between consumption periods, the satiation due to previous consumption lowers the utility of current consumption. Several implications of our model are examined, and comparisons with the DU model and the habituation model are made.

A Survey Study of Factors Influencing Risk-Taking Behavior in Real-World Decisions Under Uncertainty

With the goal of investigating decision making under uncertainty in real-world decisions, we conduct a survey requiring 261 subjects to describe a recent real-life decision and to answer questions about several dimensions of such decision, including reference-dependence, domain, the default alternative, and the type of consequences. We confirm a key prediction of prospect theory, namely, that perceiving the sure outcome as a loss increases risk-taking behavior. Such perception of losses also increases the attractiveness (perceived probabilities and estimated consequences) of the risky option. The results also confirm that the domain (professional versus private) of a decision is a factor influencing risk-taking behavior. Risk-taking behavior does not vary across the three groups considered (undergraduates, MBA students, and executives) and does not depend on the type of consequences (monetary or not). We confirm that reference-dependence, and not the default alternative, is the driver of risk-taking behavior.

Does more money buy you more happiness

Why do we believe that more money will buy us more happiness (when in fact it does not)? In this paper, we propose a model to explain this puzzle. The model incorporates both adaptation and social comparison. A rational person who fully accounts for the dynamics of these factors would indeed buy more happiness with money. We argue that projection bias, that is, the tendency to project into the future our current reference levels, precludes subjects from correctly calculating the utility obtained from consumption. Projection bias has two effects. First, it makes people overrate the happiness that they will obtain from money. Second, it makes people misallocate the consumption budget by consuming too much at the beginning of the planning horizon, or consuming too much of adaptive goods.

Bargaining with Search as an Outside Option: The Impact of the Buyer's Future Availability

This paper seeks prescriptive advice for a seller whose outside option is to sell an asset via search, while facing a potential buyer whose outside option is to walk away. In the basic model, the buyer and seller efficiently split the gains from agreement, and the future availability of the buyer is irrelevant. We compare the buyers threat of committing to never buy the asset versus the threat of delaying the agreement until the arrival of the next offer. Surprisingly, this restriction has no effect on the payoffs, even if the buyers future availability is uncertain.In contrast, when informational frictions force the seller to use an actual offer rather than the expected return from search as an outside option, enormous changes in the dynamics and outcome ensue: Sale of the asset ceases to be instantaneous, and the seller might solicit several offers prior to sale. Both the payoffs and the probability that the sale is made to the buyer depend crucially on that buyers future availability. Longer availability is beneficial to the seller and, contrary to intuition, need not be harmful to the buyer.

Tight upper bounds for the expected loss of lexicographic heuristics in binary multi-attribute choice

Tight upper bounds for the expected loss of the DEBA (Deterministic-Elimination-By-Aspects) lexicographic selection heuristic are obtained for the case of an additive separable utility function with unknown non-negative, non-increasing attribute weights for numbers of alternatives and attributes as large as 10 under two probabilistic models: one in which attributes are assumed to be independent Bernouilli random variables and another one with positive inter-attribute correlation. The upper bounds improve substantially previous bounds and extend significantly the cases in which a good performance of DEBA can be guaranteed under the assumed cognitive limitations.

Preferences Over Constructed Sequences: Empirical Evidence from Music

The satiation utility model - a modification of discounted utility satisfying local substitution - predicts that optimal consumption sequences are U-shaped (high at the very beginning, constant in the middle, and high at the very end). To test this prediction we collect two datasets of musical sequences from social media. The first dataset from Wikipedia encompasses 1,082 articles on concerts and 15,001 articles on individual songs. The second dataset from Last.fm contains 1.5 million playlists for individual use, including markers of favorite songs. Both datasets reveal a significant U-shaped pattern in song quality, with the higher-ranked or individually preferred songs being placed at the initial and the final point in the sequence. We discuss the findings in view of extant factors that may explain preferences over consumption sequences.

Legal Hold-up in Cotenancy

Abstract Our analysis (Baucells and Lippman [2001]) of the problem of legal hold-up in co-ownership, in which legal partition is the only remedy to force a sale, proceeded as if a sale of the asset could be effected at any time at a fixed price if the cotenants agree. Here we utilize the more realistic assumption that potential buyers appear intermittently (in accord with a Poisson process and that the price offered is drawn from a specified distribution). In applying the Nash bargaining solution, we select the disagreement point in accord either with Nashs methodology of rational threats or with reservation values. While neither methodology for selecting the disagreement point produces a credible threat when the agents incur legal costs, we argue that the rational threats approach produces more reasonable answers. Our main analysis considers the impact of a Poisson arrival of offers and an exponential time to court upon the optimal bargaining strategies of the cotenants.

Individual Decision-Making

To make decisions, people frequently rely on their intuition. For the most part, we do not have the time or the ability to process all the available information to make a decision rationally: that is, as a result of a well-structured and elaborate cognitive process. On the contrary, intuition is based on practice and previous experience, on judgment and pattern recognition. Although intuitive decision-making is supported by old and recent literature (Mintzberg, 1994; Gladwell, 2005), it has some shortcomings.

Correlation Between Anomalies and Theories of Mental Accounting

Several consumer choice models account for anomalies in consumption-payment decisions. We consider four models, namely, Prelec and Loewenstein 1998 double-entry model, Thaler 1985 double-comparison model, Baucells and Hwang 2014 reference price adaptation model, and Koszegi and Rabin 2006 reference dependent model. We observe that these models make distinct predictions regarding how different anomalies ought to be related or unrelated. In a controlled experiment we elicit the participants tendency towards five anomalies, namely, the sunk-cost effect, the reluctance to trade, the flat-rate bias, the preference for pre-pay, and the preference to be post-paid. The observed correlation between anomalies across individuals is consistent with the prediction of Baucells and Hwang 2014 and, to a large extent, with that of Prelec and Loewenstein 1998. The evidence is partially consistent with Thaler 1985, and we find little support for Koszegi and Rabin 2006. The results suggest that the speed of adaptation of reference prices to current price information is a key explanatory factor.